Around the Appellate Bench

In a decision dated November 13, 2013, the Appellate Division, Second Department decided a case involving a contractor, Matell Contracting Co., Inc., who performed work for a commercial tenant, attempting to enforce a mechanic’s lien against the owner of property, Fleetwood Park Development Co. 1

Fleetwood leased certain property to a new tenant and, pursuant to an agreement with the new tenant, permitted the tenant to renovate the leased property for use as a supermarket. The tenant retained Matell Contracting as general contractor. The tenant failed to pay $1,800,000 allegedly due for work performed by Matell and Matell filed a mechanic’s lien against the property. Matell then commenced an action to foreclose the mechanic’s lien against, inter alia, Fleetwood Park. Fleetwood asserted several affirmative defenses including that it did not consent to the subject work. Matell moved for summary judgment on the complaint on the ground that Fleetwood consented to the work and to dismiss several affirmative defenses asserted by Fleetwood Park. The Supreme Court denied the motion and Matell appealed.

In affirming that portion of the order denying Matell’s motion for summary judgment on the complaint and to dismiss the affirmative defense relating to consent, the Appellate Division examined the knowledge required of an owner before the owner will be liable for work performed for a tenant. The Appellate Division confirmed that Matell “presented evidence showing that Fleetwood Park had knowledge of, and acquiesced in, the work performed to convert the leased property into a supermarket . . .” But, of primary importance, the Appellate Division determined that Matell nevertheless failed to make a prima facie showing that Fleetwood Park actually affirmatively consented to the subject work. The Court confirmed the distinction between the situation where an owner has simply approved or agreed that the work be performed and where the owner affirmatively gave consent for the specific work directly to the contractor. It is this specific consent by the owner directly to the contractor that is required to be proved by a contractor attempting to hold an owner liable in connection with the foreclosure of a mechanic’s lien.

The second appellate decision comes from the Appellate Term in New World Mall, LLC v. New World Food Court, Inc2. and addresses whether a sublease is subject to a conditional limitation clause contained in a master lease.

The facts in New World are straightforward. Sublessor alleged that the sublease terminated following its service of a 10-day default notice on subtenant alleging nonpayment of late charges and electric charges. Sublessor alleged that it had the right to terminate the sublease because the sublease incorporated by reference all the terms of the master lease including the conditional limitation clause contained in the master lease. It should be noted that this type of incorporating by reference language is typical in subleases. The master lease required the tenant (sublessor) to pay certain “Minimum Rent” in the amount of $2,500,000 annually commencing on a specified date and “Interim Rent” of $60,000 per month before that specified commencement date. In contract, the sublease provided for the payment of “Basic Rent” of $110,000 per month for the first three years of the sublease plus other charges specifically designated as additional rents. The sublease did not contain a conditional limitation provision for a default in paying the Basic Rent or the additional rents.

The conditional limitation clause contained in the master lease provided that a default occurs: “If Tenant shall fail to pay (a) any Interim Rent or Minimum Rent when the same shall become due and payable, and such failure shall continue for ten (10) days after Landlord shall give notice of the failure to Tenant, or (b) any other charge required to be paid by Tenant hereunder, when the same shall become due and payable, and such failure shall continue for thirty (30) days after Landlord shall give notice of the failure to Tenant.” Despite the fact that the sublease incorporated by reference “the terms, covenants, conditions and other provisions” of the master lease, the Appellate Term determined that the default provision of the master lease “is not subject to incorporation into the sublease . . .”

The Court’s rationale was quite simple: the default clause in the master lease referenced defaults in payment of rent due under the master lease-specifically “Interim Rent” and “Minimum Rent.” The Court held that those terms had no “application” to the amounts due under the sublease “which are defined in other terms.” While somewhat troubling, the remedy is simple-either the terms, definitions and relevant default clauses in a sublease should mirror the same terms, definitions and clauses used in the master lease or, instead of taking the easy way out by simply incorporating the master lease into a sublease by reference, the sublease should contain any relevant or necessary term as if it were a stand-alone document.

1 Matell Contracting Co., Inc., v. Fleetwood Park Development, LLC, 2013 WL 5989744 (2d Dep’t 2013)
2 2013 WL 6098424 (App. Term 2d Dep’t 2013)